Small Business Revolving Lines of Credit
One of the most difficult parts of running any business is balancing the mismatch between income timing and expense timing. Income often comes in waves, with sales being quite high in one month and very low in another. This can be due to seasonality, a jump in demand, or a variety of other reasons. Expenses, on the other hand, are much more consistent; the business has to pay its utility bill each month regardless of sales, and so it goes for payroll, debt, and other fixed expenses. This imbalance can cause issues for many businesses, as they struggle to cover their expenses one month and are completely fine the next. A small business revolving line of credit is one of the best solutions to solving this problem.
What exactly is a revolving line of credit? As the name implies, it is an amount of funds available for the company to use on an ongoing basis. Basically, there is a certain maximum amount of money a company can borrow from an issuer, and if they need the money one month, they can take it and use it to pay off expenses or whatever else, and if they don’t need it the next month, they can leave the funds with the issuer and not touch them at no penalty to themselves. This is in contrast to a loan, which is a lump sum of money given all upfront. With a loan, the company must pay interest on all the money borrowed, instead of just the money they are actually using.
In this way, a revolving line of credit can be similar to a business credit card, in the sense that both are revolving amounts of potential funds. There are a few differences between the two, however, that can make a revolving line of credit a better choice for businesses depending on their needs. The largest difference between them is the way in which funds are received; with a credit card, you can only truly access your line of credit during a purchase. With a revolving line of credit, however, you can request an amount of funds anytime and have it instantly wired into your checking account. While this can technically be done with a credit card as well, it would be considered an advance of funds and often has an additional fee associated with it. This brings us to the other main difference between the two forms of credit, most notably that small business revolving lines of credit have significantly lower fees overall than credit cards due. This is true for both one time fees and ongoing fees, making the former a much better choice for a business’s ongoing needs.
So now that we properly understand what a revolving lines of credit is, let’s look at all three types of business lending and go over when the best situation is to use each of them. First, business loans can be best utilized for long term projects or goals. Because of the terms of their origination, business loans are given all up front, with interest paid on the entirety of the loan until it is paid back. This is well used for long term projects, because it is often unknown when the project will finally begin to bear fruit and give off the cash flow needed to payback the loan. In the interim period, the large amount of funds available through a full business loan will enable to the project to get rolling, while also charging lower fees that can be paid off with inplace cash inflows. When the intended project is finally profitable, the loan can be paid back in one lump sum and the project will continue producing for the company.
If business loans are on the ‘long-term’ end of the spectrum, then credit cards are on the short term end. Business credit cards have the highest fees, and therefore should be paid back as soon as feasibly possible. They are best used when something is needed to be purchased right away, and the cash flow needed to cover the credit charge will be available within a few days to a few weeks, at most. Doing this gives businesses the flexibility of buying things immediately as needed, while also avoiding paying big fees.
Finally, right in the middle of the time spectrum sits revolving lines of credit. Small business revolving lines of credit, as previously discussed, have medium fees and are best drawn from for a company’s fluctuation in operating funds. By using the revolving line of credit to pay off one month’s lows, the next month’s highs can be used to pay it right back, incurring minimal interest expense while keeping the company operating smoothly.
All these sources of lending are needed in one way or another to businesses of all sizes, so make sure you get your business rolling as efficiently as possible by utilizing revolving lines of credit to their best potential.